CBO Report Shows Why National Debt is not Just a Number

Tuesday, July 15th, 2014 and is filed under Blog, Debt, Economy

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Earlier today, the Congressional Budget Office released its updated long-term budget projection, and there is not a lot of black ink in that report.  CBO estimates that, despite receiving record revenue gobbled up from the private economy, the Treasury will continue to run enormous deficits over the next 25 years.  By 2039, the public share of the debt is projected to rise from 74% of GDP to 106%.

In light of this new report, it’s worthwhile to go back a tally Obama’s debt tab from the past 5 years and explore what it means for our future.

At present, the gross federal debt stands at $17.589 trillion, which is more than 103% of our GDP.  That is an increase of almost $7 trillion since President Obama was inaugurated five and a half years ago.  To put that in perspective, it took from the presidency of George Washington until 2004 to accumulate $7 trillion in debt.  Concurrently, Obama accumulated roughly $2.9 trillion in foreign-held debt over a little more than 5 years – from $3.071 trillion to $5.96 trillion.

More importantly, roughly 90%, or $6.2 trillion, of that $7 trillion increase is comprised of the public debt, not the so-called intra-governmental debt from Social Security (the money we ‘owe ourselves’).  It took from 1789 until the final months of the Bush administration for us to accumulate $6.2 trillion in public debt, which now stands at $12.6 trillion, roughly 74% of the economy.  It is this number that is projected to rise to 106% over the next 25 years, according to the CBO.  And remember, this president still has another two and half years to radically transform America.

So what does all of this mean?  Who cares about some banal numbers on a federal balance sheet?

Contrary to the perception of many policy-makers, the national debt is not some abstract problem that will only affect future generations once investors no longer trust the security of federal treasures.  As CBO explains (page 10), this is an immediate and near-term problem:

  • The large amount of federal borrowing would draw money away from private investment in productive capital in the long term, because the portion of people’s savings used to buy government securities would not be available to finance private investment. The result would be a smaller stock of capital and lower output and income than would otherwise be the case, all else being equal. (Despite those reductions, the continued growth of productivity would make output and income per person, adjusted for inflation, higher in the future than they are now.)

  • Federal spending on interest payments would rise, thus requiring higher taxes, lower spending for benefits and services, or both to achieve any chosen targets for budget deficits and debt.

  • The large amount of debt would restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises. As a result, those challenges would tend to have larger negative effects on the economy and on people’s well-being than they would otherwise. The large amount of debt could also compromise national security by constraining defense spending in times of international crisis or by limiting the country’s ability to prepare for such a crisis.

Much like over-burdensome regulations, high levels of debt serve as a hidden tax on the economy by sucking out private investments through an inefficient allocation of capital diverted towards growing dependency and perpetuating political careers.  Also, the relatively-low annual payments for interest on the debt, hovering around $230 billion a year, are only a temporary reprieve due to historically low interest rates.  According to Investors’ Business Daily, “if Washington had to pay the average interest now that it paid in 2000 (6.4%), it would be paying $500 billion more each year to stay afloat.”

Sadly, Americans are used to navigating opportunities and challenges based upon instant gratification or imminent danger.  Warning voters about the threat of our national debt to the future of their grandchildren is not enough.  Conservatives need to make the case that the current level of debt is a mitigating factor to current economic growth and that it will continue to diminish their wages and job opportunities.